Borrowers Are Out In the Cold

The credit crunch is now spreading to the corporate world, which had held up well even as consumers suffered. According to Standard & Poor's, in 2007 there were only 16 defaults on corporate bonds in the United States; in January, there were five. As a result, risky corporations are paying substantially more for debt today than a year ago. The spread—the difference between the interest rate on a 10-year Treasury bond and the typical rate a junk-bond issuer might pay—has expanded from 3 percentage points to 7 percentage points in the past year, according to Diane Vazza, head of global fixed-income research at Standard & Poor's.

The nation's most solvent individuals—private-equity barons—have not been immune from the ill effects of the credit crunch. In recent years, banks like Citigroup and Morgan Stanley willingly committed hundreds of billions of dollars to fund takeover deals for private-equity firms like the Blackstone Group and Cerberus—with the presumption that they could sell the loans to other investors. But as buyers have evaporated, the banks are now wary of extending further credit. Steven Schwartzman, the billionaire CEO of Blackstone, suffers no personal liquidity problems. But his firm, and others like it—have had to call off a series of proposed acquisitions because they can't get financing.

How bad will it get? The volume of bad debt—consumer, auto, student loan and corporate—is still rising. In theory, the Federal Reserve's campaign of lowering interest rates aggressively, which began in September, should help. The Federal Funds rate now stands at 3 percent, compared with 5.25 percent in September. But while that can help banks gain access to capital, lower rates alone won't help people who can't pay back mortgages, or companies that are unable to pay back loans, even at lower interest rates.

Policymakers are maintaining a stiff upper lip. But the data show the engine is running at a lower speed. Testifying before the Senate in February, Federal Reserve chairman Ben Bernanke dispensed with the usually opaque Fedspeak: "More expensive and less-available credit seems likely to continue to be a source of restraint on economic growth." Thanks, Mr. Chairman. That helps a lot.

With Mary Chapman in Detroit, and Temma Ehrenfeld and Ashley Harris in New York

© 2008